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Current paper is a discussion regarding the effects and relevance of government intervention in private markets. In mixed economies, the government and private markets own factors of production sector (Berezin, 2010). Firms undertake production of goods and services for a return. The government also provides goods and services to citizens, in addition to playing the regulatory role. Private markets are sectors in an economy that are not under direct control from governments. In such sectors, activities are carried out by the private sector for profit. Notwithstanding, the government plays an important role in carrying out activities in private market segments.
The government uses a tool, referred as fiscal policy to enter private markets. This entails the manipulation of government spending and taxes to achieve certain economic goals. The other entry point is through regulatory frameworks of the government. Legislative arm of the government plays a role in formulation of laws to guide any undertaking in the private sector (Corsetti, 2009). Laws and regulations seek to ensure a level playing ground is provided for all parties involved. The other arm of the government that takes part in private market affairs is the judiciary. It determines disputes and arbitrates any conflicts regarding matters of law. By so doing, justice is promoted in the market place for robust economic activities. In the following chapters, a discussion regarding the intervention in fiscal policy is presented.
Government Involvement through Fiscal Policy
Fiscal policy is exercised through taxation or manipulation of government spending. Various constitutions of states all across the globe permit government imposition of tax on any goods or services that are deemed as appropriate. Levying of taxes is a legitimate exercise to assist the government attain its objectives and financial obligations (Berezin, 2010). Taxes are a source of income to the government. It is from such revenues that the state is able to undertake its activities.
Taxation also plays a role in redistribution of wealth. When a tax regime is designed appropriately, corporations that earn huge amounts in incomes are taxed higher than those that earn less (Berezin, 2010). The funds are then used for provision of goods and services albeit those that benefit the poor. For instance, development of roads, health facilities and schools. Therefore, the poor get to benefit from the economic activities of other businesses.
Taxation is also used to stimulate economic growth and stability (Corsetti, 2009). Depending on the state of the economy, taxation is employed to help curb any harmful effects to the economy. When there is a recession, the aim of the government would be to jumpstart the economy (Corsetti, 2009). In such a scenario, taxes would be lowered. Consequently, it would become affordable to investors to start businesses which might result in creation of employment opportunities, leading to economic prosperity. A decrease in taxes stimulates aggregate demand that invigorates economic activities.
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In case of a boom, the government would respond by increasing taxes. The objective would be to slow down the level of economic activities and contain any harmful effects of inflation in the economy. An increase in taxes would make it expensive for investors to start any businesses (Berezin, 2010). Employment opportunities would stagnate or reduce, thus leading to attainment of governmental objective. Increase in taxes also lowers aggregate demand of goods and services and slows down economic activities.
In the economy, certain goods produced are considered to have harmful effects on the economy. Examples include alcohol drinks, cigarettes and other unhealthy consumables. The continued consumption and use of such goods causes harm to the state than it does it good. Various diseases and ailments are caused by unhealthy lifestyles. Cancer is an example of an ailment caused by smoking. In fighting such concerns, governments utilize substantial resources. The government would be keen to reduce the effects of such costs. The aim would be to discourage the consumption of such products. One strategy of discouraging consumption would be to impose taxes on such products so that they become expensive. By so doing, the objective of reducing the use of such unhealthy goods would be attained.
Government spending is the second tool used by the government under fiscal policy. Certain goods and services required in the economy may not be produced by the private sector. For instance, where the capital requirements are very high and the profit margins are low. The government has a role to provide for its citizens (Corsetti, 2009). The use of its spending is used to counter the shortcomings of the private sector, where no firm is willing to venture for various reasons.
The government also uses its spending tool to guide the course of economic activities of the private sector markets. Development in infrastructure attracts or stimulates economic activities. Investors are drawn to regions that enjoy improved infrastructure (Barro, 2011). The opposite is correct. Areas that lack infrastructural services would be shun by investors. The private sector would be keen to follow government intervention in provision of goods’ development.
From the above discussions of government intervention in the private market, the roles played by the government are of crucial assistance towards creation of an effective economic system. The measures aid towards addressing the plight of citizens. Therefore, governmental involvement in the private market activities is of positive effects. In the following chapters, governmental involvement in private sector through regulatory frameworks is offered.
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The other two branches of the government - legislature and judiciary play an equal role in the activities of the private market. The legislature makes laws that regulate the undertakings in the private markets (Argyrous & Mongiovi, 2012). Elected leaders who represent citizens formulate all regulations and policy measures. Through the legislative arm, the government is able to introduce any measures that would be appropriate for the fair undertaking of operations in private markets. Some activities that do not promote morality and social welfare can be banned through legislation. The aim is to ensure equity reigns supreme and the welfare of the society promoted.